Currency Pairs

Currency pairs are among the most popular questions I am always asked. Sometimes it surprises me how someone wants to trade forex while he/she still doesn’t know about currency pairs. But I should not be surprised, because we always focus on advanced topics like technical analysis, candlesticks and indicators and … that we forget about the basics. We do not consider that beginners may have difficulties in understanding the currency pairs that is the foundation of forex and forex trading.

In stock market, you trade shares of companies. You buy and sell them. You pay money to buy stocks. But what if you wanted to trade or buy and sell a currency?

In the stock market, companies’ shares are commodities and the currency you pay to buy them is the money. It is the same in any other kind of trading. You pay money to buy a commodity. In forex or foreign currency exchange, you trade currencies. So again, you have to pay something to buy something else. You pay a currency to buy another currency. You sell a currency against another currency. To be able to do that, they have created currency pairs. For example EUR-USD is a currency pair. In each currency pair, the first currency is the commodity and the second currency is the money. In EUR-USD, the first currency which is Euro is the commodity and the second currency which is USD is the money. When you buy EUR-USD, in fact you pay USD to buy Euro. No matter in what currency your forex trading account is. You can have a trading account in USD, GBP, CAD or any other currency. When you want to buy EUR-USD, your broker changes your trading account capital into USD and then pays that USD to buy Euro. This is how it works. Any trade in forex market has to be done through USD. US dollar is the main currency and is the axis of all transactions in the forex market. Any currency pair that you buy or sell has to be done through USD. However, all of these process will be done automatically and you just need to click on the buy or sell buttons.

Note: If you are new to forex trading, then I strongly recommend you to start from here. Instead of spending too much time on reading too many articles, these information help you learn what forex is and how you can trade forex within a couple of hours.

What are the most common currency pairs traded in the forex market?

There are many official currencies that are used all over the world, but there only a handful of currencies that are traded actively in the forex market. In currency trading, only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. For example, due to the size and strength of the United States economy, the American dollar is the world's most actively traded currency.

In general, the eight most traded currencies (in no specific order) are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).

High-Frequency Forex Trading (HFT)

High-Frequency-Trading or HFT is a trading technique using sophisticated numerical algorithms implemented on high-end computers that run the trading orders within milliseconds. The term high frequency originates from this. Compare that to traditional trading houses and banks. As a matter of fact, HFT is still a buzz word and still the term is a mystery and extravaganza.

So what really these HFT algorithms do that makes them so rewarding? So lucrative that multimillion schemes had been undertaken to reduce the network lag time between financial hubs in the United States? In 2006, over 40% of trading orders were the work of HFT companies in the London Stock Exchange alone. In 2006 25% of total orders in the Foreign Exchange markets were generated by HFT!

The HFT algorisms evaluate the market within such tiny period of time that human forex traders will never be able to manage with that speed and that precision.

Computer aided trading has revolutionized the formation of major equity and Forex markets ever since the HFT companies have started. The way liquidity was structured before had a clear directional bias. Today, the market liquidity has increased so much due to the volume of the HFT companies that the brokers offer now prices with 5 digits instead of 4. Some MT4 brokers are even offering quotes in 6 digit pips!

The typical HFT strategies include arbitrage, pair trading and trend following. It comes at no surprise since most of forex traders use speculation based strategies to profit with directional bias.

Usually the HTF has a directional input given by either a human analyst or the algorithm is designed to find the trend by itself.

Once the algorithm figures out  the “trend” it will apply certain technical indicators to buy and sell currency but the way the humans do. However, the algorithm may open and close hundreds of orders with a high speed in a low price movement.

For example, human forex scalpers work from five minute charts. As opposed to that, many HFT algorithms trade from a ten second chart where it will try to win 0.02 pips or less compared to typical 20-30 pips profit targets of the human traders.

Although the HTF trading had caught the interest of media and academic finance, we must remember that it is not a “holy grail”.

It is a just an automated strategy that uses smaller timeframes. Since the days of 2008 global financial crisis, the HFT trading has also seen huge losses and there was an article by Nathaniel Popper on the New York times that many HFT firms are indeed struggling to even breakeven now days. In 2012, HFT trading gained only $1.25 billion of profit, almost 75% down from the peak from 2009.

Finally, the trading robots. Do not rush to buy one of those scam-robots being painted with extraordinary profits by the robot-selling websites or  automated-forex-trading companies.

Do not forget that the HFT companies have a team of forex analysts to correct and re-adjust the HFT robot the way the racers of Formula 1 drive their car and make no mistakes! Those cars aren't designed for casual driving or cruising down the interstate.

Besides, most likely you do not have that kind of financial resource the HFT companies do.

Finally, even if the HFT algorithm you are using is a real deal, you need an experience in analyzing the forex markets. The HFT is not a holy grail but an extra tool to support your strategies and decisions.